Mexico Again Rejects Sherwin Deal

Mexican anti-trust regulators have once again blocked Sherwin-Williams’ push for Latin American domination, nixing the Cleveland company’s $2.34 billion bid for rival Consorcio Comex, S.A. de C.V., the largest paint company south of the U.S. border.

In a major, and clearly unexpected, setback announced Wednesday (Oct. 30), Mexico's Federal Economic Competition Commission rejected the acquisition for the second time in three months, leaving the year-long takeover attempt in jeopardy.

Unlike the 3-2 vote in July to reject, the commission's vote was unanimous this time, a Sherwin-Williams spokesman said.

The deal would have doubled Sherwin-Williams' coating business in Latin America.

Images: Sherwin-Williams

Sherwin-Williams acquired 314 Comex stores in Canada and the U.S. in September.

Announcement of the rejection came five days after Sherwin-Williams' third-quarter earnings report, which reported higher profits in the Paint Stores Group but reduced the company's full-year earnings guidance.

Reviewing Options

The "Federal Economic Competition Commission of Mexico informed the company last evening that the company’s appeal relating to its pending acquisition of Consorcio Comex, S.A. de C.V. was denied and the acquisition is not authorized," Sherwin-Williams' statement said.

"The company is currently reviewing the Commission’s decision and is considering all options, including whether to refile with the Commission."

Sherwin-Williams said it would reveal its next move in a conference call at 11 a.m. ET Friday (Nov. 1). An archived replay of that live webcast will be available at www.sherwin.com beginning about two hours after the call ends.

Mexico's Federal Competition Commission was established in 1993 to enforce the country's then-new Federal Law of Economic Competition. As such, the commission regulates mergers and acquisitions and is charged with preventing monopolistic behavior.

In a 2011 investor presentation, Sherwin-Williams discussed "Why Comex Makes Sense" as an acquisition. The blue and gray states represent Sherwin-Williams' market penetration: Dark blue states have less than 30,000 households per store. The lighter the color, the less penetration. Gray states have more than 50,000 households per store.

Part of that deal—the $90 million cash acquisition of Comex's North American business—sailed through the regulatory process in both the U.S. and Mexico and closed in September, adding 314 stores and eight manufacturing sites to Sherwin-Williams' 3,500-plus stores across the U.S. and Canada.

But the lion's share of Comex's business, which dominates Latin America, has now twice run afoul of Mexico's regulators, blocking Sherwin-Williams' expansion in a fast-growing market where it currently has little presence.

'Artificially High Prices'

In rejecting the deal for the first time in July, the commission said the acquisition would give the combined company 48 to 58 percent of the regional market share—10 times that of its closest competitor.

“It would have been able to set artificially high prices and commit anti-competitive practices to the detriment of consumers,” the commission said, as reported by Bloomberg.

The companies appealed the decision, prompting a second review.

Sherwin-Williams called the two architectural coatings giants a "good strategic fit."

Founded in 1952, Comex operates eight manufacturing sites in Mexico and is the fourth-largest architectural paint manufacturer in North America. It also manufactures industrial, protective and specialty coatings.

Both Sherwin-Williams and Comex had clearly been assuming the sale would be approved.

In announcing the deal last year, Sherwin-Williams chairman and CEO Christopher M. Connor called it "an exciting step forward in our ongoing effort to bring these two respected companies together" and said the companies were a "good strategic fit."

Cleveland-based Sherwin-Williams honored its hometown with a 10-story banner in May. The company had high hopes for the Comex acquisition.

Meanwhile, Comex CEO Marcos Achar Levy said his company was "delighted" by the deal and looked "forward to making a major contribution to [Sherwin-Williams'] ongoing success across the Americas."

And just last week, in its third-quarter earnings report, Connor said the company was "positioned well for the anticipated closing of the Comex Mexico acquisition...."

After the first rejection in July, Connor said he was "disappointed by this decision, but remain[ed] hopeful that we can adequately address the commission's objections and proceed with the transaction."

In a conference call at the time, Connor told reporters and analysts that Sherwin-Williams had "been represented in talks with the commission by outside counsel in Mexico City and members of the company's management team," Crain's Cleveland Business reported.

"Asked at the time whether the commission's decision was a surprise in light of those discussions, Mr. Connor declined to characterize it in that manner, saying instead, 'We'll just leave it as a disappointment.'”

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